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Ominously reminiscent of the second-half of 2007, Treasury yields have unexpectedly turned lower in the face of overheated risk markets. Various measures of market risk perceptions - from corporate risk premiums to the VIX equities volatility index - have this year sunk back to 2007 Credit Bubble heyday lows. According to Dealogic, year-to-date total global sales of corporate stock and equity-linked securities reached an unmatched $510 billion, outpacing 2007's record pace. IPO sales enjoyed the strongest first-half since the height of the technology bubble back in 2000. Led by technology and biotechnology issues, U.S.
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A record number of global IPOs were sold in the first half, with $90.6 billion of offerings 54% above comparable 2013. The first six months of 2014 also saw record issuance of collateralized loan obligations (CLOs). investment-grade company bond sales easily posted an all-time high. A record $286 billion of junk bonds were issued globally, as average junk yields traded to the lowest level ever. First-half global corporate bond issuance hit an all-time high $2.29 TN. The proliferation of deals was fueled by the loosest Credit conditions in years. Here at home, M&A more than doubled year-on-year to $473 billion, pushing record first-half volume to $749 billion. Second quarter global M&A volume of $1.06 TN was up 72% from the year ago period. This year's booming M&A market has posted the strongest activity since 2007. It's no coincidence that today's overheated backdrop - record securities issuance and meager risk premiums/record high prices - readily garner statistical comparison to 2007. Both are characterized by investor exuberance in the face of deteriorating fundamentals - and in both cases central bank policymaking was fundamental to heavily distorted market risk perceptions. Both periods feature overheated securities markets, replete with the rapid issuance of securities at inflated valuations. So flawed was market faith that Washington would never tolerate a general housing downturn.įrom my perspective, 20 share troubling similarities.
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The world economy is exploding with growth." Unappreciated back then was the acute fragility inherent to massive quantities of mispriced finance and speculative leverage. On the surface, things did look pretty good - "This economy is extremely strong. Stein looked pretty smart for a while, with stocks rallying back from that month's selloff to post all-time highs in mid-October. I couldn't help but to recall Ben Stein's summer 2007 article, as pundits were this week dismissing that tiny little Portugal could have any bearing on the juggernaut U.S. Some smart, brave people will make a fortune buying in these days, and then we'll all wonder what the scare was about." Ben Stein, "Chicken Little's Brethren, on the Trading Floor," New York Times, August 12, 2007 But for now, the sell-off seems extreme, not to say nutty. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. The world economy is exploding with growth. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The total wealth of the United States is about $70 trillion. So now we are down to losses of about $33 billion to $34 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. Of this amount, about 5% is actually in foreclosure, or about $67 billion. Of this, nearly 14% is delinquent, meaning late in payment or in foreclosure. Of that, a little over 13%, or about $1.35 trillion, is subprime - certainly a large sum. Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly $10.4 trillion. First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the subprime mortgage world. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets. "The job of an economist, among many other duties, is to put things into perspective. Action at the "periphery of the periphery."